The signs of our economic decay are everywhere.
Over the last 40 years, millions of Americans’ jobs have been offshored, the unemployment rate’s skyrocketed, and income inequality’s risen dramatically—all because of bad trade policies created by stupid politicians and greedy special interests.
The problems are caused by economic globalization.
Here’s why free trade doesn’t (always) work:
1. Comparative Advantage Doesn’t Always Apply
Global free trade is underpinned by David Ricardo’s theory of comparative advantage. But, like any theory, it has its limits—it’s domain specific, it only works in certain situations.
First, Let’s Define Comparative Advantage. What is it?
Basically, it’s the idea that countries should trade stuff they’re relatively good at making for stuff they’re relatively bad at making.
This improves economic efficiency, and therefore makes everyone richer.
It’s a good theory, and it’s true. The problem is that free-traders always leave out its intrinsic limits.
Limit #1: Ricardo himself realized that his theory wouldn’t work if it were possible to offshore production from one country to another (eg. move a factory from America to China, and then import the stuff from China). He recognized that this would undermine the country’s economy.
To “fix” this problem, Ricardo argued that:
most men of property [will be] satisfied with a low rate of profits in their own country, rather than seek[ing] a more advantageous employment for their wealth in foreign nations
Essentially, comparative advantage only works in a world where people aren’t greedy (according to the guy who invented comparative advantage).
Limit #2: Ricardo also employed a more technical defense. He argued that offshoring was impossible because capital was immobile (ie. you couldn’t move a factory, even if you wanted to).
This was true when he was alive, but not anymore.
Today, capital is incredibly mobile, and it’s very easy and (almost hilariously) cheap to relocate a factory to a developing country.
These two facts, that (i) people are greedy and (ii) capital is mobile, completely debunk the theory of comparative advantage by invalidating its underlying premises—the theory only works in a domestic setting (within a country), where offshoring isn’t a problem.
Ardent free-traders, like Ben Shapiro, have bastardized comparative advantage for their own purposes, and misapplied it to an inapplicable domain.
2. Trade Doesn’t Cause Economic Growth: Technology Does
Maximizing comparative advantage doesn’t grow the economy in the long term, it just provides a one-time efficiency-boost.
Economies grow when they make more, not when they consume more.
This is why GDP measures output, not consumption—consumption can be temporarily raised by selling your furniture, or buying things with your credit cards, production can’t. Production (GDP) measures the size of the real economy.
There are only two ways to increase production:
1. Work harder (increase the number of hours worked, increase the population etc.).
2. Work smarter (improve productivity, so you get more done per hour).
Option (1) provides linear growth, meaning that the harder you work, the bigger the economy will be, on a one for one basis. This doesn’t really make anyone richer in real terms.
Option (2) allows us to do more with less (make more stuff in the same time). That’s real (exponential) economic growth.
A good example is Britain’s cloth-weavers during the Industrial Revolution. The power loom made each weaver 40 times more productive than those on traditional looms. This let Britain make tons of cheap, high quality cloth.
The standard of living improved dramatically.
How do you improve productivity? Well, you can maximize your comparative advantage. But like I said, this is a one-off trade. It doesn’t provide long-term gains.
The only way to improve productivity in the long run is to improve technology.
Better technology (like railroads, light bulbs, automobiles) can greatly (and forever) improve the economy’s productivity.
It’s the only thing separating us from our Neolithic ancestors (economically speaking).
Therefore, a good economic policy will focus on retaining industries that generate technological discoveries. Instead, America’s offshoring its advanced industries at an alarming pace.
3. Economic Globalization Predicts Absurdities
No one would have believed Isaac Newton if his theory of gravity predicted that apples fell up: a theory is only useful if its predictions match reality. The same is true in economics.
Comparative advantage is wrong because it predicts absurd results.
Absurdity #1: Rich Countries Have Specialized Economies
According to comparative advantage, the way to get rich is to specialize. This is because the more specialized the economy is, the more its comparative advantage is maximized.
In reality, the opposite is true.
Richer countries usually have diverse, not specialized, economies. This is because businesses, and industries, cluster together. By doing so they can share supply chains, labor pools, and transportation costs. Essentially, where you find one thriving industry, you’ll find more.
There’s a reason the term banana republic is synonymous with poverty.
Absurdity #2: The Type Of Output Doesn’t Matter, Only The Degree Of Specialization
According to comparative advantage, the only variable that matters is the degree of specialization.
Theoretically, it doesn’t matter if the country specializes in growing coffee or making semiconductors—what matters is how much comparative advantage is being maximized.
In the real world, there is a very strong statistical correlation between a country’s wealth and the complexity of its exports—what you make matters. A country building jet engines and semiconductors is going to be richer than one making jerked beef and cornmeal (regardless of how specialized they are at jerking beef). That’s just how it is.
Compare the exports of the United Kingdom and Kenya, and you’ll get the point.
Not all industries are of equal value. Pharmaceuticals is simply more valuable than dairy or corn.
Specialization via free trade won’t necessarily make a country rich—having the right industries will. Sometimes, free trade undermines these lucrative industries (by offshoring them to developing countries), and therefore hurts economic growth.
4. Trade Boosts Consumption, Not Necessarily Production
Free trade only makes sense when trading goods for goods (if everyone makes what they’re best at, economic efficiency improves, and more goods are made in total). However, it doesn’t apply when trading goods (present output) for assets (past output) or debt (future output).
For example: if America trades property and corporate shares for Chinese goods, then it’s possible that global production could fall, until America runs out of accumulated wealth to sell. In this case, wealth is shuffled around, rather than created. The same is true of debt.
This is what’s currently happening.
This process is unsustainable: at some point America will run out of stuff to sell. At that point, we will either need to decrease our consumption (which lowers our standard of living) or increase our domestic output to trade for Chinese goods (why delay what’s inevitable?).
Right now we’re living in a consumption bubble, paid for by selling our inheritance and mortgaging our future. Eventually we’ll have to pay the piper—everything has a price.
5. The Okun Gap
Factors of production (things like buildings, machines, people) don’t always move seamlessly between industries.
What does that mean?
Pretend America sings a trade deal with Nepal. As it turns out, the Nepalese are very adept at building jet turbines (for cheap). In exchange, they buy America’s sirloin steaks. They love Texas prime.
This situation is bad for America’s jet turbine makers (who go out of business, or relocate to Nepal), but good for our cattle ranchers.
The problem is that all of America’s turbine factories, the machinery, and the technicians and engineers are now unproductive, since capital equipment from the turbine industry can’t be used in ranching (engineers usually make bad cowboys, go figure).
The factories and machines will be scrapped, and the workers will need to find other employment. This all takes time, and sometimes the capital sits idly for years—even decades. Just look at all the factories in the Rustbelt that are idle to this day, how much production did we lose?
The disparity between what the economy could produce at full output (if capital was being employed, rather than mothballed or transitioned) and what it is actually producing (apparently more efficiently due to the maximization of comparative advantage) is called the Okun gap.
When this is taken into account, the “gains” free trade brings aren’t as big as we’re led to believe.
6. Theories Don’t Always Work In Practice
The best way to grow the economy isn’t always the most efficient way.
In the 1980s the it would have been rational, according to free trade theory, for China to invest heavily in agriculture, to better maximize its comparative advantage in sericulture and rice-growing.
They didn’t do that.
Instead, they invested in manufacturing (for which they lacked even the most basic infrastructure or skills). This was inefficient (short term), but beneficial (long term).
The same was true of India’s investments in IT industries, and yet technology has turned into India’s economic bread and butter. The right kind of short term pain can result in long term gain, and the opposite is also often true—there is no easy money.
Perhaps the most ironic (and best) way to end this section is to revisit David Ricardo’s example, and look at what happened in real life.
England and Portugal actually did trade wine and cloth historically.
In 1703 they signed the Treaty of Methuen, which, among other things, exempted English cloth from Portugal’s import prohibition.
In the following decades, Portugal’s textile industry was destroyed by cheap English imports, and Portugal indeed resorted to exporting wine.
Soon afterwards England:
- Gained a textile monopoly in Portugal (they could drive up prices to above-market rates).
- Expanded her increasingly-advanced textile industry (which stimulated mechanical and engineering breakthroughs which birthed the Industrial Revolution)
- Used the profits to buy up Portugal’s vineyards, thus securing both industries (cloth was more lucrative than wine).
In the end, this deal helped England industrialize and grow rich—at Portugal’s expense.
This was great for England (China) bad for Portugal (America).
So much for “efficiency”.
7. There’s More To Good Policy Than “Efficiency”
It’s important to remember that comparative advantage is merely a tool that tells us whether or trade is efficient. It doesn’t tell us whether its strategically beneficial, or economically sound.
Comparative advantage isn’t an economic policy, any more than “supply and demand” is economic policy. Lots of people, from Henry Kissinger or Milton Friedman, forgot this.
It may have been efficient to offshore our factories to China (& friends), but was this good policy? No, America’s lost 10 million jobs in the process—this slows our economic growth and bloats our welfare system, leading to higher taxes and bigger government.
On the other side, China’s economy is as large as ours, and they’re challenging our hegemony in East Asia. We built ourselves a rival. This endangers both America and the world. Why would you want a rival power to catch up to you in economic, and therefore political and military strength?
I think that’s a stupid idea, don’t you?
Strategically, the best option is to sacrifice your own growth, if it sets your rivals back much more. All we’ve done is trade a small absolute gain for a large relative loss.
Remember, Britain did the same thing to Germany in the 1870-1890s.
It didn’t turn out well for them.
The Big Picture: Global Free Trade Failed Us
At the end of the day, free trade isn’t a policy, it’s a tool. It’s a means to an end.
It also has its limits.
We need to stop misapplying comparative advantage to inapplicable domains. Free trade is generally effective domestically, but it doesn’t always work on an international level, between asymmetrical trading partners.
If our goal is to create a prosperous society that works for everyone, we need to look beyond the black and white dichotomy created by free-trading ideologues, and realize that reality, and history, doesn’t match our models.
We need a coherent, focused national economic policy, designed to drive growth and spur technological innovation.
This is the key to success.
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